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Management failure

LAW

After the Scottish Parliament overrun, contract management came in for heavy criticism and the case of Great Eastern Hotel v John Laing Construction will not further its adoption - especially as the contractor would probably have paid out less compensation under a traditional JCT, writes Jeremy Winter

THE CASE of Great Eastern Hotel v John Laing Construction is interesting in many ways, but mostly for what it says about the form of procurement known as construction management.

You may recall contract management received heavy criticism in the wake of the Scottish Parliament building fiasco - and it does not emerge from this case looking much better.

The Great Eastern Hotel is next to Liverpool Street station in the City of London.

In 1997 its owner decided to redevelop and chose contract management as the procurement route - probably because it allows the construction process to proceed quickly prior to having the design complete.

Under this structure the client engages the trade contractors through a series of individual trade contracts.

The construction manager is not in the contractual chain with the trade contractors as he would be in a traditional form of contract or management contract.

All he does is manage construction for the client in return for a fee.This is supposed to put him on the client's side of the fence.

The common perception was that this limited his responsibility for delays and defaults by subcontractors.

GEH's initial budget for the project was £34.8 million. The outturn cost was £61 million.The project was 49 weeks late in completion, and GEH claimed £17 million damages from Laing.

Because there is no standard form contract management agreement in the UK, the contract was bespoke - with some ambiguities.Each party had an expert witness giving evidence as to what a construction manager's obligations typically are.

This was unusual because contractual obligations would normally be regarded as a matter of law, not expert evidence.

This case illustrates the different roles and consequent treatment of experts and advocates.Laing's lawyers advanced a poor argument about misrepresentation, which the judge dismissed - albeit without criticising the lawyers.

But the contract management expert for Laing expressed his views on Laing's performance and obligations and was subjected to strong criticism from the judge when those views were shown to be wrong.

Experts should be very careful to avoid being put in the position where they are effectively advocating a cause because, firstly, that is not their job and, secondly, the criticism they may get from a judge is very public and almost impossible to challenge.

Completion of the project was late for a variety of reasons.Most significant was the late erection of a temporary scaffoldbased roof over the whole building, which caused a delay of 24 weeks.Laing was held responsible for this delay because it failed to let the trade contract on time.

Laing was also held responsible for a number of other failings, including:

A delay resulting from the incorrect setting out of some steelwork;

Allowing the temporary roof to be removed before the building was watertight (resulting in damage to finishes below that needed to be re-done);

Extra cost resulting from having to issue many variation instructions to trade contractors that ought to have been part of the original packages and failing to set up and run a proper system for managing the contra-charges between the different trade contractors.

The judge also took a very dim view of the fact that Laing apparently 'doctored' its programme.

It removed a logic link, which was in the original programme, with the effect that it showed predicted completion earlier than was realistic.

The removal of the logic link was only discovered when an electronic copy of the programme was provided to GEH's team during the litigation. GEH's own professional team included separate project managers and planning supervisors.

But why they did not ask for the programme updates electronically during the course of the job, which would have enabled them to spot the logic change?

Judge Wilcox's judgement in this case contains some interesting observations about delay analysis methods.

He said that if GEH proved that Laing was in breach of its contract and that the breach materially contributed to the loss, it could recover the whole loss, even if there were another contributory cause.

How binding that view will be is questionable, given that the judge found as a matter of fact that there had not been any concurrent delay for which GEH was responsible.

The largest single sum in damages recoverable by GEH from Laing was for delay, and included acceleration costs incurred by the trade contractors and loss of profits resulting from the late opening of the hotel and restaurants.

The judgement itself does not state the total but subsequent press reports indicate that the liability was over £8.9 million.

But would Laing's liability have been this great had the contract been a traditional JCT form? There was no liquidated damages provision in the contract management agreement - hence Laing's liability for GEH's lost profits. Liquidated damages are commonly capped at 10 per cent of the initial contract price. So, the initial budget having been £34.8 million, Laing's liability for delay might have been just 10 per cent of that.

What the judgment makes plain, however, is that contract management is not necessarily a low risk procurement method - it apparently imposes extensive and potentially expensive risks on the construction manager.

Anyone trying to draft a contract management agreement for an employer could do well to review the whole judgement and pick up those points, which the judge concluded were the responsibility of a competent construction manager.

Key points

Construction management is not necessarily low-risk for contractors.

Experts should not be advocates.

Programmes should be transparent and accessible to all.

Liquidated damages provisions can be in the contractor's best interests.